This invention relates generally to methods and systems for facilitating allocation of shares of stock issued during an initial public offering (IPO). In particular, the present invention relates to methods and systems of making shares available through pre-auction and auction processes.
The capital markets in a country such as the United States may be the most sophisticated and regulated in the world. Nonetheless, the current IPO allocation system has resulted in examples of abuse and financial scandal. Commentators and investigators have referred to the current system of allocation as archaic, and have defined it in Marxian terms: “to each according to his clout.” Reliance upon the current system has compromised, on a cross-divisional basis, the integrity of many leading financial firms. Few issues have so effectively placed into question the ethics of investment banking, capital markets, equities trading, wealth management and the top executives of investment banks and their clients.
Under the current system, government, legislative and media investigators, class action attorneys and the public are currently questioning whether executives at numerous companies were effectively being bribed in return for their investment banking business. It appears that lucrative business was awarded because undervalued IPO shares were sold to important decision makers and converted into fast and relatively risk-free profits for those decision makers.
Concomitantly, these same lines of inquiry pursue the award of “cheap shares” to favored institutional and other clients. They have sought to draw the link between these awards and an agreement to pay higher commissions and purchase shares at pre-arranged higher prices. This has been cast as a market manipulation scheme that induced an unsuspecting public to buy shares at inflated prices. Essentially, it has been cast as a rigged system that allowed “friends” and insiders to reap quick profits.
Weaknesses in the current system have resulted in significant fiduciary questions relating to the relationship between investment banks and issuers. The implications of these questions have been played out in class action litigations, the opinions of commentators and proposed regulations. An argument advanced is that underwriters have systematically under-priced shares in order to ensure a “hot offering slush fund” for favored clients. This system of pricing and allocation has worked to the direct detriment of issuers who have lost valuable capital. In recent litigation, depressed and bankrupt firms (and their shareholders) have claimed that the loss of this capital perpetrated a fraud against issuers and contributed to the failure of a number of companies. As has been noted by class action counsel and commentators: investment bankers celebrate a “hot” offering that reaps instant profits for the chosen, when in the opinion of some, the bankers should instead refund their fees for ineffective pricing.
Regulators are proposing complex rules to restrict what investment banks can do with this “free money.” The proposed rules portend to reflect precisely the perspectives that contributed to the current crisis and the continuing investigations, litigation and loss of public confidence in our markets.
This present situation has international implications. The current system is an invitation to continued corruption. Over the last decade, U.S. exchanges, investment banks and the U.S. government have preached the benefits of the free market. The best hope for economies is to allow companies to act in an open and transparent market that sets prices on a competitive basis, free of corruption. The current system has proven to be an anathema to this philosophy.
What is needed is a way to mitigate corruption risks and serve to restore investor confidence in investment banking, capital markets and wealth management relationships.